Surviving and Thriving Through Market Volatility
Understanding the ups and downs for peace of mind investing
By Laurie Haelen
Conventional wisdom states that what goes up must come down. But, even if we know this, it is a proven fact that the mental pain of market losses easily surpasses the thrill of market gains, even for long-term investors.
Market volatility, even if you view it as an inevitability, can be tough to handle as it can trigger emotional reactions. For example, what if the market is declining at the very time you have decided to retire? Or, after you have made a large purchase that you felt uncertain about? Such situations may incite anxiety and fear and sometimes even a need to take action to try to get back on course. There is no silver bullet to handling the ups and downs of the market, but there are some strategies that can make it easier to bear.
Diversifying your investment portfolio is still one of the best ways to mitigate market volatility, as asset classes often perform differently across varying market conditions. Therefore, spreading your assets across a variety of investments such as stocks, bonds and cash alternatives (i.e. money market funds, short-term CDs, etc.), has the potential to help manage your overall risk.
The formal strategy of diversification is known as asset allocation, which involves identifying the asset classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class (i.e. 70% to stocks, 20% to bonds, 10% to cash). Interactive tools can help with this by helping you to understand and define objectives, risk tolerance and time horizon if you are a do-it-yourself investor. A professional adviser can also help you discover this through financial planning and help you set up your portfolio and stay on track.
Diversification, while important, can’t guarantee a profit or completely protect against an investment loss. Long-term, though, it is a proven strategy to help lessen volatility of portfolios.
Another thing to consider is to avoid the temptation to pull out of the stock market altogether and seek fewer volatile investments. The lower returns that usually accompany lower-risk investments may appear attractive when higher-risk investments (i.e. stocks) are posting negative returns.
Before you make a change in your investment strategy based upon short-term events, make sure you are doing it for the right reasons. For example, putting a greater percentage of your investment dollars into vehicles that offer preservation of principal and liquidity (the opportunity to easily access your funds) may be an appropriate strategy for you if your investment goals are short-term or if a long-term goal such as retirement has now become a more immediate goal.
But, if you still have years to invest, keep in mind that stocks have historically outperformed stable value investments over the long-term. If you move most or all your investment dollars into conservative investments, you have not only locked in any losses you may have, but you have also given up the potential for future growth.
As I have been investing in the markets for a long time, I like to think that there are opportunities, or a silver lining, in all market environments. A down market is a great opportunity to buy shares of stock at lower prices for long-term investors. No one knows when the bottom has been reached, so a good way to approach buying in a down market is to dollar cost average into it.
Dollar cost averaging involves investing the same amount of money at regular intervals over time, instead of trying to “time the market” by buying shares when you think the market is lowest. When the price is higher, your dollars buy fewer shares of stock, but when the price is lower, the same dollar amount will buy you more shares. A common example of this is a workplace savings plan, such as a 401(k) in which the same amount is deducted from each paycheck and investment through the plan.
Another thing to consider during market gyrations is to avoid becoming too focused on day-to-day returns. While you certainly should not bury your head in the sand, reviewing your plan regularly and rebalancing your investments (if a professional adviser is not handling your portfolio) is something that has been proven to be effective for long-term investors. The ideal frequency of rebalancing has long been debated, but annually (or slightly less frequently) is often recommended to ensure your portfolio is still aligned with your original goals.
Market fluctuations, regardless of why they occur, can cause a great deal of stress for even the most seasoned of investors. A final strategy to consider is if you are a person who knows that the stock market is going to cause you angst, keep some cash on hand to avoid having to pull out when the market is down. Instead of the commonly recommended six months of monthly income for an emergency fund, increase the amount by a few months to give you greater peace of mind.
As always, a professional adviser can help you with building and executing a strategy to meet your goals and assist you in sticking to your plan or course correcting from time to time as your plans evolve.
Laurie Haelen, AIF (accredited investment fiduciary), is senior vice president, manager of investment and financial planning solutions, CNB Wealth Management, Canandaigua National Bank & Trust Company. She can be reached at 585-419-0670, ext. 41970 or by email at lhaelen@cnbank.com.